July 4, 2018 / 8:38 AM / 3 months ago

Long-term euro zone yields pinned near lows on ECB duration bet

* ECB focus on long-dated debt keeps euro zone curves flat

* German state NRW set to be first to benefit, preps 50yr bond

* Most euro zone yields flat on quiet day

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, July 4 (Reuters) - The gap between short- and long-term euro zone borrowing costs were near their tightest levels in over a week on Wednesday as the European Central Bank appeared to push on with plans to focus its bond-buying on longer-dated debt.

The ECB stepped up purchases of government bonds in June to their highest level this year and Commerzbank suggested the central bank had also increased the duration of its purchases. Reuters reported last week that this would be the bank’s focus in the future.

That has helped drive the yield spread between Germany’s two- and 10-year debt to the flattest in a year, while the gap between 10- and 30-year yields has narrowed 10 basis points over the past week. .

The moves in the German curve also follow the flattening momentum in the U.S. Treasury bond market, where the 2-10 yield spread has fallen under 30 bps at the tightest levels in over a decade,

Elsewhere, French 30-year borrowing costs are close to their lowest level in 18 months while the Italian 10s/30s bond yield spread has tightened 17 basis points over the past week.

“This is hugely important because at the end of the day the amount of stimulus depends on the amount of duration the ECB extracts,” said Commerbank strategist Christoph Rieger.

HSBC reckons 10-year German Bund yields could end the year as low as 0.4 percent, slashing its previous 0.75 percent forecast due to global growth concerns and the recent flare-up in German political tensions.

Central bank buying of longer-dated debt magnifies the effect of the monetary policy as it incentivises long-term borrowing and, by extension, further spending.

It also allows countries and companies to term out their debt profiles and make them more sustainable; and the German state of Nord Rhein Westphalia looks to be the first to benefit as it plans a 50-year bond sale on Wednesday.

“The demand for 50-year is there for good reason, there’s a lot of convexity value for pension funds, and for asset managers,” said Rieger of Commerzbank.

Belgium’s Flemish Community was also in the market for a 20-year bond on Wednesday.

But on a day of thin liquidity due to the Independence Day holiday in the United States, euro zone government bond yields were largely flat.

Italian yields were the exception, rising 2-4 bps across the curve, with analysts citing a risk-off environment on trade worries as the main cause for shedding low-rated Italian bonds.

China is putting pressure on the European Union to issue a strong joint statement against U.S. President Donald Trump’s trade policies at a summit later this month but is facing resistance, European officials said.

Meanwhile, euro zone business activity nudged up slightly faster than previously thought last month, surveys showed but with firms at their gloomiest since late-2016, there seemed to be little hope for a more robust rebound. (Reporting by Abhinav Ramnarayan Editing by Andrew Heavens)

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